Hawaii's Oldest Bank Has a Quiet Moat — Buffett's Framework Gives FHB a 6/9

What Is First Hawaiian?

First Hawaiian, Inc. is the holding company for First Hawaiian Bank, Hawaii's oldest and largest financial institution. Founded in 1858, the bank operates 44 branches across Hawaii, three on Guam, and one in Saipan, serving individuals, businesses, and government entities with deposit accounts, commercial and consumer lending, credit cards, and wealth management services. It trades on the Nasdaq under the ticker FHB with a market cap of roughly $3.5 billion.

The business model is straightforward community banking: gather low-cost deposits and lend them out at higher rates. Net interest income accounts for roughly 75.6% of total revenue, making lending the dominant revenue driver. The remaining income comes from fees, service charges, and wealth management. First Hawaiian had $24.0 billion in assets, $20.5 billion in deposits, and $14.3 billion in loans as of December 31, 2025.

What makes First Hawaiian distinct is its geographic concentration and incumbent position. As the oldest bank in Hawaii with deep community ties, it benefits from a deposit base that is unusually sticky. Hawaii's island geography naturally limits competition — it's harder for mainland banks to replicate the branch density, local relationships, and brand trust that First Hawaiian has built over more than a century and a half. The bank delivered full-year 2025 net income of $276.3 million on revenue of $853.6 million, with a full-year return on average tangible equity of 16.3%.

How First Hawaiian Scores on All 9 Buffettology Criteria

First Hawaiian earns a 6 out of 9 on the Buffettology scoring system. For a regional bank, that's a respectable showing — banks face structural headwinds on certain criteria that favor asset-light businesses. Here's the criterion-by-criterion breakdown.

1. High Return on Equity — PASS (16.3% ROATCE)

Buffettology requires ROE above 12%. First Hawaiian's return on average tangible common equity came in at 16.3% for full-year 2025, with Q4 hitting 15.8%. This reflects the bank's ability to generate strong returns on its tangible capital base. For a community bank operating in a geographically protected market, consistently producing mid-teens returns on equity signals a franchise with real earning power. The bank's disciplined deposit gathering and conservative underwriting translate into reliable profitability without excessive risk-taking.

2. High Return on Invested Capital — FAIL

ROIC measures how efficiently a company deploys all its capital — debt and equity — to generate returns. For banks, this metric is structurally challenging because the business model inherently involves taking on deposits (a form of leverage) to fund lending. First Hawaiian's capital-intensive banking operations mean its ROIC falls below the 9% threshold when measured against total invested capital. This isn't unusual for even well-run banks — the nature of financial intermediation requires large balance sheets relative to earnings.

3. Cash Machine — FAIL

This criterion evaluates free cash flow relative to total assets, with a threshold of 5%. Banks operate fundamentally differently from non-financial companies: their "inventory" is money itself, and capital expenditures are minimal relative to the massive balance sheet. With $24 billion in assets, generating 5% free cash flow to assets would require $1.2 billion in free cash flow — an impossible bar for a bank earning $276 million in net income. This criterion structurally disadvantages financial institutions regardless of quality.

4. Fair Valuation — PASS (7.9% Earnings Yield)

The earnings yield (inverse of P/E) must exceed 3.5%. First Hawaiian's trailing P/E of approximately 12.6x translates to an earnings yield of roughly 7.9% — more than double the threshold. The stock trades at a modest premium to the US bank average of 11.9x but well below the broader market multiple. For a bank with 16.3% ROATCE and a 168-year operating history, a mid-teens earnings yield suggests the market isn't pricing in much premium for quality.

5. Share Buybacks — PASS (Shares Declining)

Buffett favors companies that shrink their share count over time. First Hawaiian's outstanding shares have declined from approximately 129 million in 2021 to 125 million in 2025, a roughly 3% cumulative reduction. The company completed a $100 million share repurchase program in 2025 and authorized a new $250 million buyback with no specific time frame. Management is clearly committed to returning excess capital — the new authorization represents roughly 7% of the current market cap, signaling continued share count reduction ahead.

6. Defensible Moat — FAIL

Gross margins above 40% indicate pricing power and a competitive moat. This criterion doesn't translate cleanly to banks, which don't have "gross margins" in the traditional product-company sense. A bank's equivalent — its net interest margin — was 3.21% in Q4 2025. While that's a healthy NIM for a community bank (and expanding, up 2 basis points quarter-over-quarter), it doesn't clear a 40% gross margin threshold. First Hawaiian arguably has one of the strongest competitive moats of any regional bank — geographic isolation, 168 years of brand equity, sticky deposits — but this criterion can't capture it numerically.

7. Simple Business — PASS (Financial Services)

First Hawaiian operates a textbook community banking model: take deposits, make loans, earn the spread. There are no complex derivatives books, no proprietary trading operations, no opaque structured products. The bank serves Hawaii, Guam, and Saipan with straightforward financial services. Buffett himself has invested heavily in banks throughout his career — he understands and favors the model. First Hawaiian's operations are easy to understand and analyze, squarely meeting this criterion.

8. Conservative Debt — PASS (Very Low Non-Deposit Debt)

First Hawaiian maintains an exceptionally conservative balance sheet. Excluding customer deposits (which are the raw material of banking, not traditional debt), the bank's debt-to-equity ratio is minimal. Its CET1 capital ratio stands at 13.2% — well above regulatory minimums and among the strongest in the regional banking peer group. The current ratio and liquidity position are healthy, with $20.5 billion in deposits funding $14.3 billion in loans, leaving substantial liquidity buffers. This is a fortress balance sheet.

9. Consistent Growth — PASS (20.1% Five-Year Net Income Growth)

Five-year net income growth must be positive. First Hawaiian's net income grew from $230.1 million in 2024 to $276.3 million in 2025 — a 20.1% year-over-year increase. Over the full five-year period, earnings per share compounded at 6.9% annually, growing from $2.05 in 2021 to $2.20 in 2025. While the growth trajectory wasn't perfectly linear (EPS dipped in 2023 and 2024 before rebounding), the five-year trend is clearly positive. Revenue grew from $754.5 million in 2021 to $853.6 million in 2025, a steady upward trajectory.

The Bull Case

First Hawaiian has several compelling arguments in its favor:

Geographic moat is real and durable. Hawaii's island geography creates a natural barrier to competition. Unlike mainland regional banks that face constant pressure from national players and fintechs, First Hawaiian benefits from physical isolation, deep community relationships, and 168 years of brand trust. Deposit gathering in Hawaii requires local presence — you can't easily disrupt that from San Francisco or New York.

Capital return program is accelerating. The new $250 million share repurchase authorization — with no expiration date — represents roughly 7% of the market cap. Combined with the $1.04 annual dividend (yielding approximately 3.8%), total capital returns to shareholders are substantial. Management has demonstrated willingness to buy back shares aggressively, and the bank's 13.2% CET1 ratio provides ample excess capital to fund continued repurchases.

Net interest margin is expanding. NIM grew to 3.21% in Q4 2025, driven by lower deposit costs (total cost of funds fell 12 basis points to 1.29%). As higher-rate CDs reprice lower and the deposit mix continues to improve, there's room for further margin expansion. The bank's 2026 NIM guidance of 3.16-3.18% is conservative and assumes two rate cuts.

Loan growth is healthy and diversifying. Total loans grew $183 million in Q4 (5.2% annualized), with strength in C&I and CRE lending. The 2026 guidance calls for 3-4% loan growth, driven by commercial real estate and commercial & industrial loans. New customer acquisition — including adding an auto dealer customer — shows the bank is still finding growth opportunities in its market.

Tangible book value is compounding. TBVPS grew 11.7% annually over the last two years, from $11.60 to $14.46 per share. This steady growth in intrinsic value per share — combined with the dividend and buybacks — creates a multi-layered return profile that doesn't depend on multiple expansion.

The Bear Case

Investors should weigh these risks honestly:

Analyst consensus is bearish. Among 8 analysts covering FHB, the consensus rating is Sell, with 63% recommending Hold and 38% recommending Sell or Strong Sell. Goldman Sachs maintains a Sell rating with a $25 price target. When most of Wall Street is cautious on a stock, there may be fundamental concerns the bullish case overlooks.

Hawaii's tourism-dependent economy is a concentration risk. Tourism accounts for roughly 20% of Hawaii's GDP. A recession-induced decline in travel — or a structural shift in tourism patterns — could strain the bank's commercial loan portfolio, particularly dealer floor plan loans and hospitality-related CRE. First Hawaiian's fate is inextricably linked to Hawaii's economic health, offering no geographic diversification.

Deposit trends require monitoring. While deposit costs improved in Q4, the broader trend of deposit migration from low-cost checking accounts to higher-yielding products hasn't fully reversed. A continued decline in retail and commercial deposits, or a spike in non-performing assets, could pressure earnings. The bank held $20.5 billion in deposits, and any meaningful outflows would directly impact lending capacity.

Growth ceiling is inherent. Hawaii's population is relatively static, and the bank already has dominant market share. Organic growth is constrained by the size of the addressable market. The 3-4% loan growth guidance for 2026, while healthy, reflects the reality that First Hawaiian can't grow much faster than the local economy. This limits the upside for investors seeking aggressive earnings growth.

Rising nonperforming loans could emerge. Credit quality has been solid, with a 1.18% allowance for credit losses to total loans ratio. But investors are watching for any uptick in nonperforming residential loans. Hawaii's housing market is among the most expensive in the nation, and any softening could expose the bank to elevated credit costs.

Valuation Overview

First Hawaiian's valuation reflects the market's mixed views on regional banking:

• Trailing P/E: 12.6x vs. US bank average of 11.9x
• Earnings Yield: ~7.9%
• Price/Tangible Book Value: ~1.9x (based on TBVPS of $14.46)
• Dividend Yield: ~3.8% ($1.04 annual dividend)
• EPS (2025): $2.20
• Market Cap: ~$3.5 billion
• CET1 Ratio: 13.2%
• 52-Week Net Interest Margin: 3.21% (Q4 2025)

At 12.6x earnings, FHB trades at a slight premium to the US bank sector average of 11.9x but above its own historical fair value ratio of roughly 11x. The premium reflects the bank's strong Q4 results and expanding margins, but the Sell consensus from analysts suggests the current price may already capture near-term upside.

The average 12-month analyst price target is $27.17, which implies limited upside from recent trading levels around $27-28. Goldman Sachs is the most bearish at $25, while bulls see the stock's capital return program and margin expansion supporting a price closer to $30.

For valuation context, FHB's 3.8% dividend yield is among the highest in the regional banking peer group, and the $250 million buyback authorization adds another layer of shareholder return. If the bank sustains $2.20+ EPS and the market applies even a 13-14x multiple, the stock would trade in the $29-31 range.

The Buffettology Verdict

First Hawaiian's 6/9 Buffettology score reflects a fundamentally sound business that runs into the framework's structural bias against financial institutions. The three failed criteria — ROIC, free cash flow to assets, and gross margin — are all metrics that penalize the capital-intensive, balance-sheet-heavy nature of banking. No community bank, no matter how well-run, is going to produce 40% gross margins or 5% FCF-to-assets ratios.

What the six passing criteria reveal is more telling: a bank with strong returns on equity, conservative capital management, consistent earnings growth, a simple business model, and a commitment to returning capital through buybacks and dividends. The 13.2% CET1 ratio is a fortress, the 16.3% ROATCE is among the best in regional banking, and the 168-year operating history speaks for itself.

The investment debate ultimately comes down to geography. If you believe Hawaii's economy remains resilient and tourism continues to recover, First Hawaiian's dominant local position and expanding margins make it a compelling income-and-capital-return story. If you're concerned about concentration risk and a tourism-dependent economy, the bearish analyst consensus may be warranted. Buffett's framework identifies the quality — the market debate is about the price.

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